Next Level Gaming: Microsoft’s record Activision deal could spawn acquisition frenzy

Dealspeak 2 February

Next Level Gaming: Microsoft’s record Activision deal could spawn acquisition frenzy

Microsoft’s [NASDAQ:MSFT] USD 75bn all-cash acquisition of gaming company Activision Blizzard could set off a round of consolidation that puts the future of fun to the fore.

For years, Microsoft has built its gaming business through acquisitions, picking up Minecraft in 2014 and Zenimax in 2020. It sees a big opportunity in its subscription business, Games Pass, which increased users by 39% to 25m last year. Part of that is Microsoft’s cloud gaming service, which allows gameplay across various devices, not just its Xbox console. Activision titles such as 'Call of Duty' will boost Games Pass and help turn Microsoft into the Netflix for video games.

What is striking is the sheer size of Microsoft’s transactions. They dwarf anything the other tech giants have done. Partially that is because Facebook [NASDAQ:FB], Apple [NASDAQ:AAPL], Amazon [NASDAQ:AMZN] and Alphabet's [NASDAQ:GOOG] Google have been under greater scrutiny from regulators and lawmakers, amid a focus on data aggregation and misinformation.  Microsoft’s USD 3bn breakup fee for Activision indicates a confidence it can complete the deal. It helps that Microsoft does not monetize consumer information the way some of the FAAMGs do. But regulators are revising merger rules and may turn this into a test case for the gaming sector, says one sector advisor.

Into the metaverse

Microsoft believes Activision will provide “building blocks” for the metaverse, a buzzy term for a virtual online world that gained currency after Facebook rebranded as Meta. What form the metaverse will take is the subject of much debate, but gaming is widely regarded as a natural entry. 

Bernstein Research analyst Mark Moerdler believes Microsoft already had many pieces for the metaverse: its cloud infrastructure service Azure can run metaverse applications, gamers can don its HoloLens augmented reality glasses, and its software development capabilities allow it to offer tools to other metaverse platforms or become a platform itself.  Where Microsoft lacks strength is in ecommerce and 3D content creation, currently addressed through a partnership with Adobe [NASDAQ:ADBE]. 

Acquisition blizzard

With Activision, Microsoft becomes the world’s No. 3 in gaming by revenue, after Tencent [HKG:0700] and Sony [TYO:6758]. 

Microsoft might continue its acquisition run, Amazon could strengthen its gaming offering – along with some of the other FAAMGs –  and Tencent and Sony could buy US gaming companies, say dealmakers.

The three most compelling targets for Microsoft – and the others – are Electronic Arts [NASDAQ:EA], Take Two Interactive [NASDAQ:TTWO] and Epic Games, says Todd Holman, a banker at Union Square Advisors. 

EA is attractive because its NFL and FIFA sports franchises release new versions annually. Take Two’s USD 12.7bn acquisition of Zynga, announced earlier in January, makes it strong in mobile gaming, a nascent category for Microsoft.

Epic Games is intriguing because it has managed to attract users to spend money on non-game events, such as concerts staged inside its 'Fortnite' game, adds Holman. Those concerts, featuring Travis Scott in 2020 and Marshmello in 2019, give Epic strong metaverse credentials. A legal battle with Apple over app store payments could dissuade buyers though, cautions the sector advisor.

Unity Software [NYSE:U], a 3D content creation platform, also could be attractive, says the advisor. Several startups raised large rounds in 4Q21 and could become targets. They include blockchain gaming platform Forte, wearable tech developer Magic Leap, and augmented reality software developer Niantic, creator of Pokeman Go.

Game on!

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